Growth vs. Value Stocks: Time to Make a Move?

Just as U.S. equities have outpaced those from abroad in recent years (see “Is It Time to Consider European Equities?”), so too have certain equity types fared better than others within the U.S. stock market.

Fueling much of the market’s gains over the past decade, for example, are so-called growth stocks (think Alphabet, Amazon and Apple). Although such stocks generally pay low or no dividends, investors are often willing to pay a premium for their exceptionally bright prospects.

Value stocks, on the other hand, tend to trade at a discount relative to their book value, cash flow and/or price-to-earnings ratio (think AT&T, Coca-Cola and Exxon Mobil). Such stocks tend to pay higher dividends, in part because their growth prospects aren’t nearly so rosy.

Historically, growth stocks have performed well during periods of modest economic expansion and low interest rates (as in recent years), whereas value stocks have excelled during periods of steady economic expansion and rising interest rates (such as the one we appear to be entering now).

So, after a decade of go-go growth stocks, is the pendulum ready to swing back in value’s favor?

Mind the gap

Looking back at the last cycle of interest-rate hikes, value stocks did in fact significantly outperform growth stocks. From June 2003 through June 2006, the Russell 1000® Value Index returned nearly 56%—as compared with roughly 30% for its growth counterpart.1

That said, there are two reasons why simply swapping out growth stocks or funds with their value-oriented cousins may not be the right move:

Blurred lines: The distinction between growth and value stocks is far less pronounced than it once was. Tech companies, for instance, are often labeled as growth stocks; however, many are no longer the scrappy upstarts of yesterday but rather established, dividend-paying companies with healthy balance sheets and strong earnings. By the same token, companies once defined as traditional value plays are investing in new technologies and capitalizing on new growth opportunities.

Timing: Even professional investment managers find it difficult to successfully time the market. If you reallocate resources from growth to value stocks too soon, for example, you risk missing out on gains you might otherwise have captured.

Mixing it up

That’s not to say investors should sit tight. The strong performance of growth stocks in recent years may mean they now comprise an outsize share of some portfolios. (Indeed, the performance gap between the Russell 1000 Growth Index and Russell 1000 Value Index is greater today than at any time since 2008—see “The growth decade,” below.) Investors in this situation might consider selling some of those growth stocks, if only to bring their portfolios back in line with their target asset allocations.

The growth decade

The divergence between the Russell 1000 Growth Index and Russell 1000 Value Index is greater than at any time since 2008.

Source: Schwab Center for Financial Research and Morningstar. Data from 01/01/2008 through 07/31/2018. This chart represents a hypothetical $100,000 investment in each index and is for illustrative purposes only. Returns include reinvestment of dividends, interest and capital gains. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

Another approach would be to combine traditional index funds, which screen and weight securities according to their market capitalization, with fundamental index funds, which screen and weight securities based on metrics such as sales, cash flow, and dividends and buybacks. Employing both strategies can deepen your diversification.

After all, growth stocks may or may not continue their winning streak, but it’s always a good idea to be positioned for a sudden sea change—and to rebalance if your portfolio has strayed too far from its target allocations.

1Schwab Center for Financial Research and Morningstar. Data from 06/01/2003 through 06/01/2006.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events can be created that may affect your tax liability.

Past performance is no guarantee of future results.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly.

Russell indexes are market-capitalization weighted and subsets of the Russell 3000® Index, which contains the largest 3,000 companies incorporated in the United States and represents approximately 98% of the investable U.S. equity market. The Russell 1000® Growth Index contains those Russell 1000 securities with a greater-than-average growth orientation. The Russell 1000® Value Index contains those Russell 1000 securities with a less-than-average growth orientation.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

(1118-8LXT)

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